Value Sciences Inc.

Friday, April 5, 2019

After whiplash of
a turnaround in most markets, Canada TSX up by 13.3% and US by 11.2%, the watch
phrase today is “sit, wait and watch” which is what the US federal reserve is
doing. That of course leads most other governments to stop talking about raising
interest rates and even thinking about cutting it.

It is
always dangerous to talk about “it is different this time” in stock market
investing but that seems to be what is being discounted now. After decades of
declining rates, we had an impatient outlook that the drop is over, and it must
be time for rising rates. Surely how much lower can it go? Many countries in
Europe and Japan are lending money at zero, even negative interest rates. This
hasn’t really happened before. We are in uncharted territory.

This disparity of what our linear thinking suggests versus what is happening is
because of an economy which has some with more money than they need while
others with barely enough for retirement. Higher rates help those who have
savings but not those who need money. This will only change slowly as the big
cohort of baby boomers age and slowly pass their wealth to the next generation.
Hard to put an estimate on how long this lasts but surely it will be decades
rather than years. So, we watch and wait before the return of what we know from
previous market movements. One economist believes requirement for more
mechanical stuff which used to be a major source of industrial growth may be
waning as we spend more time on our desks.

Bonds
which pay virtually nothing here and negative returns in some economies have
proven to still be a stabilizing asset. A balanced portfolio was much less
volatile during the December rout. A 2% return is better than losing value.
Desire for extra return or yield will add more volatility than in the past.
All isn’t negative. A slower growing economy may mean shallower recessions when
it comes. We are in the “lower for longer” regime again. Other than increasing
our fixed income portion of our assets, we are not changing our strategy.

A
quote from National Bank Financial latest report, 4 April 2019.

"... temporary
employment ─ which, like the yield curve, is a decent leading indicator ─ even
registered a quarterly decline in Q1. The other report, the household survey,
showed a large drop in employment driven by cuts in full-time positions. And
with full-timers often better remunerated than part-timers, one should not be
too surprised by the moderation in wage inflation, the latter dropping in March
to 3.2% on a year-on-year basis. The only reason the unemployment rate managed
to stay unchanged at 3.8% (despite sizable job losses in the household survey)
was the drop in labour force participation. All told, there are reasons for the
Federal Reserve to be cautious and remain in pause mode for a while.
"

Why is inflation so low?
U.S. Watch By Krishen Rangasamy, NBIN

U.S. employment costs are on the rise thanks to a tight labour market. Latest data from the Bureau of Labor Statistics indeed showed the employment cost index (ECI) rising 2.8% year-on-year in Q1, close to the cycle high reached the prior quarter. But higher employment costs are not translating into surging U.S. inflation, the annual core PCE inflation rate falling to 1.7% in the first quarter, well below the Fed’s 2% target. So why is inflation so low?

It’s not because of the services sector whose PCE deflator has been rising at a roughly similar pace to its ECI in the last 15 years. As today’s Hot Charts show, it’s the goods sector that’s not converting rising employment costs into higher goods price inflation. In fact, despite goods sector ECI rising 2.4% year-onyear in Q1, the goods PCE deflator fell during the quarter and on a year-on-year basis.

And here, blame the strong U.S. dollar which is keeping import prices under wraps. Goods producers are more subject to global competition than their counterparts in the services industry and they seem to prefer absorbing the higher costs instead of passing them on to consumers and risk losing market share to cheaper imports.

Sunil Vidyarthi, Ph.D., MBA

President and Portfolio Manager

A noted investment counselor, author and scientist based in Oakville, Ontario, Canada. Dr. Vidyarthi has over 25 years of investment and technology research experience and is a well known investment columnist and contributor to Investor's Digest. He also provides investment research on the Financial Post Universe of 500 stocks.

His background and experience also includes:Past Chairman - Finance Committee of McMaster University Board of Governors, responsible for the proper management and use of significant public and personal capital.

J. Patrick L. Magee, MBA, CFA, BA.HONS

Senior Vice President and Portfolio Manager

Patrick has over fifteen years of investment experience managing investment portfolios for individual private clients and acting as portfolio manager for a number of mutual funds focused on dividend paying equities. Prior to his investment industry experience, he worked in management consulting, finance and accounting. He has an undergraduate degree from Queen’s University in economics and a Master of Business Administration from McMaster University. He is a member of the Toronto CFA Society and holds the designation of Chartered Financial Analyst

Patrick is responsible for investment research and portfolio management for individual private clients.

Frances M. Connelly, CFA, MBA, BA

Senior Vice President and Portfolio Manager

Frances has been managing investment portfolios for over 25 years.Her clients have included pension funds, mutual funds, corporations and private individuals. She has a wide knowledge of the investment industry, having been a portfolio manager with the pension fund of a large public company, and a fund manager with a large mutual fund company.

Frances' focus is on helping clients to define and achieve their investment goals, using her broad experience in managing risk and working with portfolios of different types of assets, including equities, bonds, preferred shares and convertible securities.

Frances' educational background includes a BA and MBA from Queens University. She holds the Chartered Financial Analyst designation and is a member of, and past Director of, the Toronto CFA Society.

Frances is responsible for investment research and portfolio management for individual private clients and non-profit organizations.